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Pricing That Isn't Locked-Down Allows Products To Be Stolen

You would think that simply by setting the price of your product and then telling the world about it would wrap up that part of being a Product Manager, right? Well guess what, in this era of the Internet everything having to do with product pricing has become more complicated. What you need is a new set of tools that will help you to lock-down your product’s pricing…

Ban Your Customers

Product managers know that not all customers are the same. The rise of the Internet and its ability to provide customers with a virtually unlimited view of your product’s pricing has created a new type of customer – the returner.

This type of customer is obsessed with getting the lowest price on your product. That means that they’ll search for the lowest price and buy your product through that channel and start to use it. However, even after they buy your product they will continue to search for lower prices. If they find a lower price, then they’ll buy the product through the lower price channel and then turn around and return the unused product to the channel that they originally bought it from to get the higher price refunded.

You don’t need this kind of customer. What product managers need to do is to carefully watch your customers purchasing and returning behavior. You’re going to want to spot names, addresses, and credit cards that keep showing up that are part of this kind of cycle. Once you know who they are, you’re going to be better off refusing to sell to them in the future – it’s just not worth it.

Eliminate Surplus Supplies (and Pricing!)

Depending on what kind of product you are managing, you may occasionally run into the situation in which you have too much of an older version of your product. The question of how to get rid of these products is always a difficult one to solve.

Lots of times product managers will sell off their remaining stock of product to discount channels. This used to be a good strategy when those channels operated in geographically diverse locations that didn’t overlap with your product’s primary channels.

Now that the Internet has information on everything, your discount resellers have the ability to show up right next to your primary channels when a customer goes searching for your product. This can quickly cause problems if their price for your previous product is much less than the price of the current model.

Product managers in this situation often find that they need to remove the lower cost versions of their product from the market. This can be as simple as buying them back from the resellers and then either destroying them or selling them in different countries where they won’t compete with your primary channels.

Don’t Promote Your Brand – Hide It!

Generally speaking, product managers work very hard to get their product’s brand out in front of their customers as often as possible. However, when we find ourselves in a situation where we need to get rid of an older or overstocked product, the opposite is true.

In these situations we need to hide our brand from our customers. It no longer matters the high quality of our product – we just want people to buy it so that we can clear out the shelves. When we use middlemen to get rid of these products, product managers need to make special requests.

Stripping the product name and the company’s name from the product that is being sold can help. What we want to avoid is lowering the perceived value of the product (or version) that we are currently offering. Making sure that the discounted product does not confuse customers is one way to do this.

Play The (Internet) Search Game

Let’s face it – your potential customers are smart. They spend a lot of time on the Internet and on your company’s web site studying how to get the best deal on your product.

You may be surprised at how resourceful they are. Often times customers will use your pricing and promotions schemes against you. This can be as simple as trolling your web site to find out where you offer the same product at the lowest price or by combining different discounts in order to get the lowest price.

What this means for product managers is that we have to always be on the lookout for the prices that our web sites are offering. When we start to see a flurry of orders coming in via the web site at a low price, it is well worth our time to check out just exactly what is going on.

What All Of This Means For You

The arrival of the Internet has changed the way that Product Managers can price their products. Gone are the days that we could charge one customer one price and then turn around and charge another customer a different price. The Internet has made it all too easy for our potential customers to compare prices.

In order to take back some of the control over what people pay for our products, product managers need to change the way that they allow their products to be sold. This includes dropping some customers, eliminating discounted products, hiding their brands, and managing the role that Internet search engines can play.

One of the reasons that we chose the product management profession is because it is so dynamic. The Internet’s impact on how we price our products is a great example of this. Instead of throwing our hands up and giving up, we product managers need to understand the changes that we’re facing and adapt. Those of us who do this well will become even more successful product managers.

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: What do you think the best way to make sure that there are no surpluses of your product would be: ship fewer units to distributors or buy-back extras?

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product – it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

Is it possible that you are managing too many products? Sure, as product managers we actually like it when we have multiple products to manage. Sure, we’ll complain to everyone, but deep down inside we really like the assurance of having multiple products belong to us because then we’re confidant that at least one of them will always be doing ok. It turns out that not only is this thinking wrong, it might actually be bad for our company also…

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The Internet Can Kill A Product's Pricing

That there Internet is a powerful tool in the hands of your potential customers. You probably vary the price of your product over time – lowering it when you want to boost sales or when you have a new version that you are getting ready to introduce. Well guess what, your customers have figured out what you are doing and they are using the Internet to tell everyone else about it. What’s a product manager to do?

How Did Your Customers Get So Smart?

Things didn’t always used to this way. Once upon a time Product Managers could charge different prices to different customers whenever they wanted to. We had special lower prices for our best customers and we could use discounted prices to drive our customers to purchase from us using the channels that we wanted them to use.

Oops, those days are over. Now that the Internet has arrived with a vengeance, those days are now officially gone. Our customers have finally figured out how to use that Internet thing and they are using it with a vengeance to find out what our lowest prices are no matter where they are.

Our customers are no longer acting alone – now they travel in packs. Working together, people who review our products, consultants, and previous buyers are all adding what they know about our product pricing to the online discussion and this is the information that is being used by bargain shoppers worldwide.

Add to this mix the powerful new Internet tools that have become available over the past few years and you’ve got Product Managers on the run. Search engines are able to quickly and efficiently find any price that we’ve ever posted online while so called “search-bots” are now scouring the Web 24×7 looking for the best available product price no matter where we’ve hidden it.

This has all contributed to a new customer mind-set. They have now come to believe that with a little bit of effort they should always be able to find a way to purchase our products at the lowest possible price. Clearly, we Product Managers need to do something about this situation.

How Product Managers Can Battle Bargain Hunters

Yes, the world has changed. However, that doesn’t mean that product managers need to throw in the towel. Instead, we simply need to acknowledge the new world order and we need to start to make some to changes to how we both price our products and how we communicate those prices to our customers.

Here are four steps that Product Managers need to take in order to tackle the problem of Internet fueled bargain hunters:

1. Do A Better Job Of Online Listening: Before you can solve a problem, you first need to understand what that problem is. You can start to understand what information your bargain shoppers have on your pricing by taking the time to go online and find out what they know. Once you know how your customers are getting those low prices (perhaps by combining various discounts), you can take steps to change your discounting strategy and rules to shut some of these doors.
2. Love Your Bargain Hunters: Although all Product Managers like to sell their products at the highest price possible, sometimes we need to clear out our inventories and that’s when we learn to love our bargain hunters. What we need to do is start to set limits on just how good of a bargain (or for how long) we’re willing to allow bargain hunters to get a really great deal on our product.
3. Don’t Become A Commodity: If the product that you are selling looks like other products that your potential customers can buy, then you are forcing them to make their buying decision based on price. Don’t do this. Instead, package or bundle your product in unique ways in different channels in order to make it stand out both from both the competition and from the other channels that you are offering the product through.
4. Control Who Sells What & Where: When we strike partnerships with other vendors, they can often turn around and sell our products to our potential customers. If we’re not careful, they may end up selling it at a lower price than we’re offering it. That’s why setting a minimum resell price as a part of our agreement with a vendor needs to be a critical part of any such deal.

What All Of This Means For You

Product Managers know that the Internet is a powerful tool – most of us use it every day. However, our potential customers have discovered it also and they are using it to discover how we price our products.

Product managers need to accept that this is the new way of the world and react to it. There are different ways to handle all of the pricing information that customers are getting from the Internet. Some include monitoring what your customers are saying about your product’s prices, catering to some of your bargain hunter customers, making sure that your product is not seen as a commodity, and making sure that you control your sales network.

You can’t fight the power of the Internet. Instead Product Managers need to find ways to embrace it and understand that their customers are going to have more information on how a product is priced than they have ever had before. Using this knowledge to your advantage will allow you to sell even more of your product!

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: If too much pricing information about your product gets out onto the Internet, do you think that you should change your pricing strategy?

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product – it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

Dang it! This was supposed to be a story about a product success, not a product failure. Pure Digital created the low-end highly portable video camera market a few years back and then got bought out for a half a billion U.S. dollars by the networking giant Cisco. Cisco is stuffed with smart, bright product managers and they should have been able to boost this successful product into outer space. But they didn’t and now the Flip video camera is going away, what happened?

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It's Not The Price That Matters, It's How You Present The Price

How to correctly price a product has always been a bit of a black art for most product managers. The goal is to not price a product so high that nobody is willing to buy it, while at the same time not pricing it so low that you end up leaving money on the table. It turns out that the correct way to price a product has to do with its parts, not with its cost…

What Do Your Customers Value?

Pricing for a product comes down to two things: what are your customers willing to pay for the product and how satisfied will they be with the amount that they ended up paying for it? In order to create a price that will meet both of these customer expectations, product managers need to find the best way to present their product’s benefits to their customers.

This is where the problems first show up. All too often product managers spend their time (often at the request of their senior management) focusing on the cost of their product when instead they should be worried about communicating the product’s benefits.

The correct way to go about pricing your product is to view it not as a complete product, but rather as a collection of components (product, accessories, support, configuration options, documentation, etc.). Each component does not have the same value to your customer. This means that product managers need to take the time to carefully price each component so that it closely matches the value that the customer places on that particular component.

What Customer Pricing Experiments Show

Researchers Dr. Rebecca Hamilton and Dr. Joydeep Srivastava have studied how customers value different components of a product. They used auto repairs as the product that was being offered and they identified three different components of this product: parts, labor, and shipping (of the parts).

In their studies, the researchers discovered that customers valued parts more than labor, and parts more than shipping. The take-away from this research was that customers assigned a higher price to those things that they viewed as providing them with a higher benefit.

An important lesson for product managers came from the second part of the researcher’s study. Here they dropped the price for labor to nothing. That made customers nervous — somewhat surprisingly they preferred to pay at least something for this component. Clearly, dropping the price of a product’s component below an accepted threshold doesn’t make the product more attractive – it actually makes it less attractive.

Three Guidelines

The end result of the studies were the creation of three guidelines for product managers who are getting ready to price their products:

1. It’s All About Needs: Product managers need to make sure that they fully understand their customer’s needs. If your car battery needs to be replaced, you will be willing to visit a store and pay full price for a new battery and a big discount on the motor oil that you’ll need later instead of visiting another store that can offer you a small discount on both.
2. Bundles Work: : The researchers found that product managers who can combine both high-value and low value components together in packages do the best. They also caution that a product manager should only take the step of offering low-value components for free if that is what the current market will allow.
3. Value Is In The Eye Of The Beholder: : If a product that you are responsible for has a benefit that you think that customers should be placing a greater value on, then it is the responsibility of the product manager to do something about it. Specifically, you need to find ways to clearly communicate the value of that component to your customer in order to boost its value.

What All Of This Means For You

In the end, what your customers are going to be willing to pay for your product is going to depend on how valuable they view it as being. Product managers need to understand that their customers don’t see their product as a blob, instead they see it as a collection of multiple components that they place different values on.

In order to price a product correctly, product managers need to break their product up into the components that their customers see. Then those components need to be matched to your customer’s goals – what do they really value? Finally, high and low benefit components can be grouped together in order to boost your customer’s willingness to pay for the product.

Nobody ever said that pricing a product correctly was going to be easy. However, taking the time to understand how your customer views your product and the value that they put on the different components of your product is the key to doing pricing correctly. Get this right, and you’ll have found the secret to being a successful product manager!

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: When do you think is the best time to offer low-benefit product components for free?

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product – it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

Product pricing? How boring. Working with development teams? Yawn. Mixed Martial Arts fighting inside of an 18′ chain-link fence — bring it on! I recently had a chance to watch the Ultimate Fighting Championship’s (UFC) broadcast of UFC 128 – a pay-for-view fight between 10 different men. In the end, I had seen a lot of punches, kicks, blood, and important lessons about product management. Do I have your attention now?

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Sometimes Our Pricing Plans Don't Work The Way We Want Them To

If you asked a product manager what the scariest part of their job is, I think that you’d get a lot of them telling you “pricing”. It’s sorta a black hole – you make a guess, cross your fingers, and then hope that enough customers buy your product at a given price and that you’re not leaving money on the table. On top of all of this, it turns out that there are 7 common pricing mistakes that product managers make – are you guilty of making any of these?

Mistake #1: My Product Is Not Worthy

Since we work with our products day in and day out, we have a tendency to become just a bit too familiar with them. This can lead us to start to believe that there is nothing about our product that deserves “premium pricing”. This is always wrong. Every product has some unique feature or use that will allow it to demand a higher price.

Mistake #2: An Average Price Is A Passing Grade, Right?

What could be simpler than charging all of your customers the same price. Just imagine how nice this would make things for your sales teams and for the billing team. Oh wait a minute, could you be leaving money on the table? The answer is yes.

Over at UPS they had a one price fits all strategy for years. Then along came FedEx and they cleaned UPS’ clock by offering their customers variable pricing which allowed some to pay more than the average and some to pay less. Turns out that this is what customers were looking for.

Mistake #3: Can’t Go Wrong With Cost-Based Pricing

So I’ll give you that creating and explaining a price based on your product’s costs is actually pretty easy to do. However, and this is a big “however”, this is completely the wrong way to go about doing your pricing.

The reason that it’s wrong is because it’s inflexible. As you sell more, your costs will go down. To do this type of pricing you’d have to recalculate your prices for each product and the first one that you sold would be way too expensive.

Mistake #4: But The Other Kids Were Doing It

All product managers are guilty of doing this at one point in time or another. We look around in our market space and see what our competition is charging for their product.

The problem with doing this is that you are assuming that the competition knows what they are doing (not a safe assumption) and that your product is exactly the same as theirs. Since both of these are probably wrong, don’t price your product this way.

Mistake #5: Motivating The Sales Team In The Wrong Way

The ultimate goal of any product is to generate as much profit for the company as possible. The problem is that all too often sales teams are working with the wrong motivations to make this happen.

Most sales teams are motivated by volume of sales. This causes a problem because a great way to pump up your volume is to slash your price (and your profit). It instead you motivate the sales team based on the value that they deliver, then you’ll be doing the right thing for the company.

Mistake #6: Staying In Your Silo

If you’re going to do product pricing correctly, then a bunch of different departments within the company are going to have to work together. All too often this isn’t happening.

Product management is going to have to work with finance and sales to create prices that work. Everyone’s going to have to crawl out of their silos and pull together on this one…

Mistake #7: But The Customer Said That It Was The Right Price…

When did a customer ever come up to you and say “I’d like to pay more for your product?” I’m betting never.

Letting your customers tell you what to price your product at is a bad idea – they’ll never tell you the truth. Instead, you’re going to have to determine the value and then use that information to create a price that your customers are going to be willing to pay.

What All Of This Means For You

Yes, coming up with a price for your product can be a scary thing for any product manager to do. However, it’s also probably one of the most important jobs that you have.

In order to do a good job of pricing, you’ve got to make sure that you’re not making one of the 7 pricing mistakes that we’ve covered. Now that you know about them, you’ll be able to avoid them.

At the end of the day we’ve all got to remember that there is a difference between your product’s price and the act of pricing. Your product’s price is what your customer is willing to pay for it while pricing is what a product manager does to make sure that customers are going to want to buy it. Good luck!

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: If cost-based pricing is wrong, then what do you think the right way to price a product is?

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product – it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

Product Managers have long struggled with the idea of getting an MBA. Sure, it seems like a good idea, but who has the time or the energy to haul yourself off to some college campus several times a week to attend classes. There are those “online” universities that let you do it all over the Internet, but they still seem just a bit shady. Isn’t there another way to get the results that you want?

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You Can Only Lower Your Product's Price So Far Before You're Out Of Business

What do most product managers do whenever their product sales start to decline? No matter if it’s because customers have lost interest or if it’s because a new competitor has just shown up, we all tend to do the same thing: slash our prices. In the new competitive global marketplace this doesn’t work any more. It’s time for some new thinking on how product managers deal with prices.

Why Not Slash And Burn?

Isn’t lowering your product’s price one of those classic techniques that they teach everyone in those expensive MBA programs? I mean, if you can lower your product’s price for long enough you can probably drive your competition out of business and then you’ll have the whole market to yourself. Ta-da!

This may sound like a plan (a bad plan, but a plan nonetheless), but it turns out that there are very few companies (except perhaps WalMart) that can actually pull this kind of “everyday low prices” thing off. The rest of us generally just end up hurting ourselves when we cut our product’s price in reaction to some market forces.

What’s A Better Way To Compete?

It turns out that some very smart people, Dr. Frank Cespedes being one of them, have been studying this very problem. What they’ve found is that for the rest of the world (that means you), a much better way to compete just might be to raise your product’s price.

Your customers are looking for solutions to their problems. If your product is the one that delivers the best solution, then they will be willing to pay a higher price for it. This is what is called “competing on performance”.

How Can A Product Manager Compete On Performance?

In order for a product manager to user the concept of competing on performance in order to allow his / her product to command a higher price in the market, what Dr. Cespedes says that we need to do is to change the type of battle that we are willing to enter into. Instead of trying to compete on price, he says that we need to shift and instead change things so that our product is competing based on what our company does better than anyone else.

Its these strengths, our unique benefits, that lie at the heart of our product’s long term success. This isn’t going to be easy for you product manager. Instead of trying to figure out just how low you can drop your prices, what you really need to be doing is spending your time finding ways to reshape your product so that it better meets your customer’s individual needs.

Keep in mind that this doesn’t mean that your product’s price is not important. It still is. As the product manager you are responsible for keeping your costs under control as well as making sure that the price that you are charging is a reasonable price.

What All Of This Means For You

Trying to compete and dominate a market based solely on a product’s price is a fool’s quest. Yes, there are some firms that are able to do this; however, they have built their entire business around keeping prices low. If your firm doesn’t have this engrained mind-set, then you need to find a different way for your product to be successful.

The key to your product’s long term success is to walk away from the very notion of trying to compete on price. Instead, take the time to understand how your customers view your company. What is it that you do differently than everyone else? How can you leverage this characteristic into a part of your product offering that will make it unique and allow you to command a higher price?

This approach to product pricing requires product managers to do your homework. Sure the old way seemed easier, just keep dropping your price until you get enough customers, but since that will no longer work you need a new tactic. Competing based on performance just might be your ticket to long term product success…

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: What kind of company characteristics do you think that customers would value and would allow you to charge a higher price for your product?

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product – it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

If you want to sell a lot of your product, where is the best place to try to sell it? Would it be better to go to a crowed market where there are lots of people but also lots of other product managers with similar products? Or would it be better to go into a dark alley where there are fewer people, but also fewer competing product managers? If you can answer this question, than you’ve got that “long tail” thing down cold…

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Does The World Need Another Brand Of Coffee?

So there you are product manager, sitting on the top of the world in charge of the #1 selling brand of coffee and you’re pulling in something like $4 a cup. Then all of a sudden: blam! The global economy falls off a cliff and suddenly there are a whole bunch of competitors who start to poach your customers by offering premium coffee at a much lower price. What’s a product manager to do?

Starbucks’ Low-End Problem

Everyone knows about Starbucks coffee – it seems like there is a Starbucks store on every corner right now and new ones seem to be popping up all the time. Well, according to the Starbucks product managers, that’s not enough.

Lately McDonald’s, Dunkin Doughnuts, and just about every other fast food chain out there have started to offer espresso-based coffee products. Oh, and they’ve been doing it at prices that are lower than Starbucks. The Starbucks product managers have seen this happening, but they have been constrained from doing anything because by necessity Starbucks has a limited menu (in order to keep things moving quickly) and the majority of their business is done in the morning.

While all of this has been going on, the number of Americans who drink premium coffee has increased. In fact, in just the last three years alone the number doing so has jumped from 29% to 35%. Great, so what’s a coffee product manager to do?

Is It Time For A New Brand?

Seven years ago Starbucks bought one of their competitors: Seattle’s Best Coffee. They haven’t done that much with them since then, but thanks to the Starbucks product managers that will soon be changing.

Starbucks plans on rolling out a second coffee brand, you guessed it, Seattle’s Best Coffee. This is the brand that they are going to use in order to compete with the lower-priced fast food coffee offerings that have been nipping at their heels.

This is where the real product management innovation will occur: this new brand is going to be sold everywhere. That means that you’re going to start to see it in about 30,000 different locations ranging from fast-food outlets, supermarkets, bookstores, and even vending machines.

Can We Talk About Risk?

I can almost hear some of you starting to mumble concerns about this approach. You’ve got a good point. Since Starbucks is going to be selling most of the Seattle’s Best Coffee through franchisees they are going to have a significant quality control issue. Additionally, the coffee that is sold though vending machines is generally the worst coffee out there – what is Starbucks thinking?

The product managers at Starbucks point out that they really don’t have all that much to risk. Right now Starbucks has less than 4% of the U.S. market for brewed coffee. There’s no place to go but up. Additionally, the engineers at Seattle’s Best have created a new type of vending machine that they believe can actually deliver a good cup of coffee.

What All Of This Means For You

Starbucks finds itself in a difficult spot: it’s got the #1 selling coffee product; however, the competition is coming on strong. The product managers at Starbucks realize that if the competition is successful at taking away the lower end of their customer base, then there will be nothing to stop them from moving up and capturing more and more customers over time.

Starbucks is taking the novel approach of launching another brand: Seattle’s Best Coffee. They hope that by distributing this product everywhere they will be able to take some of the wind out of the sails of their competition (and money out of their pockets).

For product managers everywhere we have been given a front row seat to a major product strategy move. If you keep your eyes open and see what Starbucks does and how their competition reacts, then you’ll be able to find out how this story turns out…

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: Do you think that Starbucks should have just lowered their prices to keep more customers?

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product – it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

Way back when you were just a green product manager and you were still learning the marketing ropes, I’m going to bet that someone once upon a time sat you down and told you that sometimes when there is not enough of your hot product to meet customer’s demand, this can be a good thing. Well, it turns out that they were wrong and I’m going to tell you why…

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Evernote Gives Their Product Away, That Can't Work - Can It?

The part of being a Product Manger that I hate the most is pricing. How am I expected to come up with just the right price for my product? Who am I – Goldilocks: my product’s price is supposed to be not too high, not too low, just right? That’s a tall order. Now I’ve found out that this impossible task has just become harder: an entirely new way of pricing has shown up and it’s called freemium…

Why The Right Price For Your Product Is $0 (Not!)

Like ungrateful disaster victims who grab their Red Cross food packages and walk away without saying thanks, your customers would love to get their hands on your products for free. Now while this will make your customer extraordinarily happy, it will drive your company out of business overnight. Good marketing concept, bad business concept.

Damon Darlin at the New York Times has been looking into this new pricing scheme. Just like a product management version of crack, pricing your product at $0 is so attractive that you can find even the large guys doing it: Flickr, YouTube, etc.

Having an “it fell off the back of the truck so just take it” sale everyday for their products sure gets them lots of “customers”; however, even though they are huge and seem to be doing well, a close look at their books shows that free is a pricing model that is slowly killing them also.

How Do You Make Money If Your Product Is Free?

Wouldn’t you know it, there are actually some smart product managers out there who have taken the time to sit down and figure out a way to tame the wild beast that is a free product. While everyone else is getting eaten by the cost of supporting an unlimited number of freeloading customers, these guys have actually started to make some serious money. What’s their secret?

I know where these successful product mangers have been spending their time: strip clubs. If you’ve not been to a strip club in a while then you may not be aware of the clever marketing that goes on there. To get in to the club is generally free, to get the undivided attention of the performers is going to cost you.

This is the only place that the product managers could have realized that the secret to having a successful free product is to create a better version of the free product that once hooked, their users would be willing to pay more to get their hands on. What these paying customers are willing to pay is what the company can use to support everyone else’s use of the product (or they could sell expensive beer like they do in strip clubs).

The madness of giving away the product that you’ve worked so hard to create and spent so much to market is called freemium, a term that Fred Wilson, a New York venture capitalist came up with.

Show Me Some Proof That Freemium Can Work

Instead of drinking the kool-aid of free product pricing that all of the other companies seem to downing, Phil Libin who is the CEO of Evernote, a startup that offers a web-based storage system for personal information is brewing his own brand of product pricing.

Phil’s Christmas wish is that Evernote will be able to convince enough of the folks who are using their product for free to convert to paying customers in order for the firm to start making money.

Cracking open Evernote’s books reveals some interesting user behavior patterns:

• Longer Relationships Are Good: The longer a user continues to make use of the Evernote application, the more profitable they become to Evernote.

• One Night Stands: An amazing 75% of the people who use Evernote end up leaving within the first four months. You would think that no company could withstand this kind of enduser turnover; however, the money that Evernote is making from the 500,000 folks who have opted to start paying them is actually growing faster than Evernote’s overall customer base.

• Reasonable Prices: In order to entice users to become customers, Evernote keeps their prices nice and low: $5 a month or $45 a year for the extra features that heavy users just have to have.

• More Stuff Means More Value: somewhat unsurprisingly it turns out that the more that Evernote’s customers use their service, the greater the probability that those customers will end up as paying customers. The simple reason is that once you’ve got a bunch of stuff stored at Evernote, it would be a big pain to move it somewhere else.

Final Notes

If you’d like to lose your product manger job real quick, you just go ahead and march right in to your CEO’s office and tell him / her that you’d like to start giving your product away because you read a blog post that said that it was the trendy thing to do.

Nope, freemium is a crazy idea that works for some product managers, but probably won’t work for all. If your product is trying to break into a crowded marketplace and you don’t really have any compelling features that will make your product the “must have” solution, then perhaps a freemium approach would be a way to get some attention and lots of users.

If you do this, then your product is going to have to be able to get by on slim profits from each customer. Over at Evernote they only get 3 cents of revenue from each active user during their first month of use. This gets better after a year when those customers start providing roughly 35 cents each. You’d need a lot of customers to make this work out!

Are you up to it – could your product withstand freemium pricing?

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What We’ll Be Talking About Next Time

I’ve got a quick question for you: what is the next step in your career? What do you want to get promoted to? In fact, as long as we are talking about that, what comes after THAT promotion? In product management the career ladder generally goes: product manager, director, executive director, VP of marketing, Sr. VP, CEO. Got a plan on how you are going to get to that next step?

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Breakeven Analysis Is How Product Mangers Defend Their Pricing

Product managers know that how they price their products can be the difference between runaway success and total failure for their products. However, knowing this and knowing how to price well are two completely different things. In fact, there is often a great deal of outside pressure on product mangers to change their product’s price all the time. When should a product manger do this, and when should they not?

An Introduction To Breakeven Analysis

It turns out that numbers are on the side of a product manager when it comes to pricing. Assuming that you’ve done your homework and you’ve come up with what you believe to be a fair price, then you’ve got a good place to start from.

Almost without fail, folks on the sales team will show up and tell you that you’ve priced your product too high – they’ll never be able to sell it at its current price. This is where break-even analysis comes in.

The trick is that any discussion about your product’s pricing can’t just be about the price. Instead, it needs to also include a discussion of how many units will be sold at a given price. You got it – what we’re really talking about here is profit. Your company doesn’t really care if you sell a million copies of your product at $1 each or just one copy for $1M. What they care about is the amount of profit that they’ll make from selling your product.

Break-even analysis gives you the tools that you need to figure out how your product’s price and the quantity of products that need to be sold are related.

How To Use Breakeven Analysis

What break-even analysis is going to allow you to do is to calculate the minimum number of sales that your sales team is going to have to make in order to make up for any lowering of your price (or fewer sales if you are going to raise the price).

Here’s the formula:

The formula uses the amount that you want to change your product’s price by (in $) and divides it by your current margin (CM – how much profit you currently make on each sale) added to the price change once again. Note that the price change has a sign – negative if you are lowering your price, positive if you are raising it.

If you’d like to hear me explain this in greater detail along with some additional examples, it’s all online at Product Pricing: Cost Plus is Wrong, So What’s Right?

Final Thoughts

As product managers we are ultimately responsible for the success of our products. How we choose to price our products plays a big role in their long term success. Nobody will ever be happy with our pricing and we’ll always be asked to make changes to it.

Breakeven analysis is a tool that product mangers can use to expand the pricing discussion to include sales quantity. This turns the entire discussion into a profit discussion and that’s the type of conversation that product mangers should be having. Product managers who can do this will have have found yet another way that great product managers make their product(s) fantastically successful.

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What We’ll Be Talking About Next Time

So what do product mangers mange? Generally I’d agree with you if you answered “products“; however, I’ve been giving this some thought and I think that we’re missing the mark if that’s our answer.

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Product Managers Need To Manage Their Product Mix In Tough Times

Ok, I’ll say it one more time: times are tough all over. If you are a Product Manager who’s product is, how shall I say this nicely, priced on the high side then what are you to do in these troubling times?

Sure you can mess around with your product’s pricing and you could even consider launching another lower priced product line if you were so inclined. However, sometimes that’s just not possible. What then product manager?

Creatively Offering Less Expensive Products

This is one of those discussions that if we don’t get grounded real quick we’re going to end up flying off into the either and I’ll just be talking to  myself. So just for a minute, let’s pretend that you are the product manager who is responsible for Ferrari cars at an auto dealership – no you don’t make ‘em, but you do control the marketing mix.

Right now there are three new “hot” Ferrari models: F430, 599, and 612 Scaglietti. But of course it is a down economy Mr. Ferrari dealership product manager. What are you going to do?

The F430 is going to put your customers back about $218,000, the 599 will cost them roughly $320,000, and the 612 will put them back $313,000. Let’s not even talk about tax, tags, and dealer prep costs!

Hopefully it goes without saying that the Ferrari F430 is your bargain product here. In troubling times, when people go out to buy a Ferrari it sure seems like they’ll be picking up more F430s than other models. This is an important fact for any product manager to realize.

Only Make What You Can Sell

What our Ferrrari example is designed to help us understand is that one additional tool that a product manager has in his / her pocket is the ability to control your mix of products that you offer to your customers. If you were controlling what Ferraris a dealership presented to its customers you’d start stocking more F430′s and fewer 599′s and 612′s.

Now a small point of subtlety is required here. At our fictitious Ferrari dealership, we WILL be having some folks come in who are flush with cash and will want to buy an upper end 599 or 612. Fantastic! Let’s make sure that we’ve got a couple of those on hand so that we can take care of them and then stock the rest of the dealership with F430s.

Final Thoughts

I’m not a product manager responsible for stocking a Ferrari dealership; however, how cool would that be? Even if we are responsible for less glamorous products right now, the lessons learned apply to us also.

Right now most of our customers are trying to conserve money so they will be looking for lower priced products. If you are responsible for controlling the mix of products (or product configurations) presented to your customers, then you need to increase the low end and minimize the high end for now. At the same time, you need to realize that you’ll always have the occasional high end buyer and so you need to be ready to service them when they show up. This is how great product managers make their product(s) fantastically successful.

Questions For You

If you are responsible for multiple products / configurations have you been seen customers go cheap on you? How are you reacting to this shift in demand? Have you increased the quantity of low end products that you have ready to sell? Are you still ready to sell to a customer who wants your high end product? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

In the world of product managers there are a few stories that the old hands talk about when they get together. The product failures, the flubs, and the downright fiascos that have grown into legends that are now only mentioned in hushed tones when a  product manger is trying to kill a product idea that he / she knows will doom a product. One such story is the tale of New Coke.

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Stormy Economic Seas Can Cause Product Managers To Consider Slashing Prices To Stay Afloat

Not to get too doom and gloom on you or anything, but how is your product doing these days? Sales a bit down? Sales fallen off a cliff? Desperate times call for desperate measures and I’m willing to bet that you are starting to get some pressure from upstairs / sales to start slashing your product’s price.

Don’t do it! Pricing is a complex beast and if you start slashing, you’re not going to be able to raise it once things get better. I’ve got a different approach for you to take – try performance based pricing.

What NOT To Do In Bad Times

I’m not sure about you, but in my experience when the good ship business starts to run into stormy waters, the first thing the captain wants to throw overboard are the advertising and marketing programs (to which product mangers are firmly attached). Clearly, communicating with the customer is seen as an unaffordable luxury.

Can you tell that I think that this is a VERY bad idea? After those budgets have been given the old heave-ho, the crazed captain and his crew start looking at your product’s price as a heavy weight that must be gotten rid of if the firm is to make it through the storm.

In these desperate times, what nobody seems to remember is that if you dramatically lower the price of your product, you will have done two potentially fatal things to your product from which it may never recover.

The first is that you’ve now cut any profit that your product has been bringing in. This is pretty much like drilling a hole in the company boat. Now not only do you have to worry about the economic storm swamping the boat, but you’ve got red ink flooding in to the lower compartments and you not having a bailing bucket.

Finally, can anyone take just a moment and think about what a very low price for your product is going to communicate to your customer? The low quality / diluted brand effect is going to be like a sailor’s tattoo – you won’t be able to remember where you got it, but it’s always there.

A Different Way: Performance Based Pricing

Difficult times require innovative thinking – put down your PowerPoint slides and get your calculator out. What this means for you is that instead of slashing your prices, perhaps it would be better to do away with your existing pricing model all together. How’s that for out-of-the-box thinking?

What we’re talking about here is moving from a fixed price scheme like you have today to a performance based pricing scheme. This approach is best suited to product managers who have service based products, but with a little creative thinking it can be applied to almost any product.

Performance based pricing calls for you to stop charging your customer up-front for the full price of the product. You may still charge them some smaller fee to cover processing the order and perhaps shipping and installation. However, in these hard times their up-front charges will be dramatically reduced.

Fear not – your product has not become a charitable gift. Rather, your contract with your customer now reflects a sharing between your two firms of the benefits that your customer will receive from using the product. Ah, how’s that for a switch?

The Devil Is In The Details

As you can probably imagine, just how that contract gets written is the key to your product’s and your firm’s long term success with performance-based pricing. Almost all of the risk in this setup now lies on your shoulders…

There are three key performance-based pricing considerations that you need to keep in mind when you are working out the contract details with your customer:

• Stick With Customers That You Know: A pricing scheme like this needs to be used with customers that are operating in industries that you know something about. That new customer who is developing that tidal wave powered fuel cell is probably a poor candidate.

• Define “Success”: Your customer is buying your product to accomplish some very specific thing. Do you know what that is? Do they? Working out an agreement as to what “success” looks like is critical to making this type of pricing work.

• Control The Variables: Even if you both agree as to what success looks like, there are many other things that can get in the way of your customer achieving it. You need to lock down the possible variables that can allow your customer to claim that success was not achieved.

Final Thoughts

When you are awakened in the night by the ship’s captain who tells you that the boat is going down and your product’s pricing is too heavy and needs to be thrown overboard, remember that you’ve got options. In my experience, rash pricing decisions made quickly at the end of all-day strategy sessions always come back to haunt you.

Performance-based pricing is one pricing tool that you have that just might allow you to emerge from this economic storm with your product’s brand intact. This is how great product managers make their product(s) fantastically successful.

Questions For You

Are you getting pressure to slash your product’s price? Are you going to be able to say “no”? Have you tried anything else to lower your customer’s cost? Do you think that performance-based pricing would work for your product? Why or why not? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

Ok, I’ll say it one more time: times are tough all over. If you are a Product Manager who’s product is, how shall I say this nicely, priced on the high side then what are you to do in these troubling times?

P.S.: Free subscriptions to the brand-new The Accidental Product Manager Newsletter are now available.

It’s your product -  it’s your career.

Subscribe to The Accidental Product Manager Newsletter now:
Click Here!

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